DBOI GLOBAL SERVICES P.LTD, MUMBAI V. PR CIT 9, MUMBAI

ITA 3170/MUM/2015

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8044 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-12-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 03-04-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 26-05-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B PRUSETH
• Keywords: Opportunity of being heard; Fair market value; Assessment record; Capital receipt; Revenue expenditure; Capital expenditure
• Section: 143(3); 37(1); 37; 263; 63

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA, AM AND SHRI PAWAN SINGH, JM ./ I.T.A. NO. 3170/MUM/2015 ( / ASSESSMENT YEAR: 2008 - 09) DBOI GLOBAL SER VICES PRIVATE LIMITED BLOCK B - 4, LEVEL 6, NIRLON KNOWLEDGE PARK, WESTERN EXPRESS HIGHWAY, GOREGAON (E), MUMBAI - 400 063 / VS. PR. CIT - 9, AAYKAR BHAVAN, M. K. MARG, MUMBAI - 400 020 ./ ./ PAN/GIR NO. AACCD 2953 L ( / APPELLANT ) : ( / RESPONDENT ) / APPELLANT BY : SHRI NIRAJ SHETH / RESPONDENT BY : SHRI B. PRUSETH / DATE OF HEARING : 05.10.2017 / DATE OF PRONOUNCEMENT : 11.12 .2017 / O R D E R PER SHAMIM YAHYA , A. M.: THIS A PPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE PR. COMMISSIONER OF INCOME TAX - 9, MUMBAI , PASSED U/S. 263 OF THE ACT. 2. T HE GROUNDS OF APPEAL READ AS UNDER: 1) THE PR. COMMISSIONER OF INCOM E TAX - 9, MUMBAI (HEREINAFTER REFERRED TO AS CIT) ERRED IN PASSING AN ORDER UNDER SECTION 263 OF THE INCOME - TAX ACT, 2 ITA NO. 3170/MUM/2015 (A.Y. 2008 - 09) DBOI GLOBAL SERVICES PRIVATE LIMITED VS. PR. CIT 1961 ('THE ACT') ON THE GROUNDS THAT THE ORIGINAL ASSESSMENT ORDER PASSED UNDER SECTION 143(3) OF THE ACT WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. 2) THE CIT ERRED IN NOT APPRECIATING THE FACT THAT THE ASST. COMMISSIONER OF INCOME - TAX, RANGE 8(1), MUMBAI (HEREIN AFTER REFERRED TO AS THE AO) HAD CONDUCTED APPROPRIATE ENQUIRY AND RAISED SPECIFIC QUERY WITH RESPECT TO DEDU CTION OF EQUITY STOCK OPTION SCHEME (ESOP) EXPENSES, IN RESPONSE TO WHICH APPELLANTS HAD FILED SUBMISSIONS DURING THE ORIGINAL ASSESSMENT PROCEEDINGS AND HENCE THE ASSESSMENT ORDER WAS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE INTEREST OF THE REVENUE. 3) T HE APPELLANTS SUBMIT THAT THE ORDER UNDER SECTION 263 IS BAD IN LAW, VOID, IN EXCESS OF AND/OR WANT OF JURISDICTION AND OTHERWISE ILLEGAL AND SHOULD BE QUASHED. 4) THE CIT ERRED IN DIRECTING THE AO TO SET ASIDE THE ORIGINAL ASSESSMENT ORDER, ON THE ISSUE OF CLAIM OF ESOP EXPENSES OF R S.1 1,19,35,000 AND PASS AFRESH ORDER AFTER CONDUCTING NECESSARY ENQUIRIES IN THE MATTER. 3. IN THIS CASE, A SHOW CAUSE NOTICE U/S. 263 OF THE ACT WAS ISSUED TO THE ASSESSEE AS UNDER: KINDLY REFER TO THE ASSESSMENT ORDER PASSE D U/S. 143(3) R.W.S 144C(13) OF THE I. T. ACT, 1961 DATED 21 .1 0.2012 PASSED BY THE ERSTWHILE D CI T - 8(1), MUMBAI. ON PERUSAL OF THE RELEVANT ASSESSMENT ORDER/CASE RECORDS MAINTAINED FOR THIS PURPOSE (NOTES TO ACCOUNTS AT SR. NOS. 15 & 18) IT IS NOTICED THAT A N AMOUNT OF RS. 11,19, 35 ,000/ - HAS BEEN CHARGED BY THE ASSESSES COMPANY UNDER EMPLOYEES COSTS ON ACCOUNT OF EQU IT Y STOCK OPTIONS, WHICH IS ACCORDINGLY ALLOWED BY THE ASSESSING OFFICER IN THE SAID ASSESSMENT ORDER DATED 21.10.2012. HOWEVER, IT IS EVIDENT THA T THE SAME OUGHT TO HAVE BEEN DISALLOWED, SINCE THE SAID LIABILITY TOWARDS EMPLOYEES COMPENSATION WHICH IS PAYABLE I N FUTURE IS AN UNASCERTAINED LIABILIT Y. OR IN OTHER WORDS, THE SAID L I ABILITY TO BE INCURRED IN FUTURE CANNOT BE ESTIMATED WITHOUT REASONABL E CERTAINTY AND THEREFORE IT IS APPARENT THAT THE LIABILITY TOWARDS SUCH FUTURE COMPENSATION CANNOT BE SAID TO HAVE BEEN DEFINITELY ARISEN DURING THE PREVIOUS YEAR RELEVANT T O THE CURRENT ASSESSMENT YEAR. MOREOVER, THE ASSESSEE ITSELF HAS CATEGORIZED THE S AID EXPENDITURE OR LIABILITY IN ITS FINAL ACCOUNTS AS P ROVI S IONS FOR SHARE BASED PAYMENTS'. THEREFORE , I T IS EVIDENT THAT IT IS A MERE PROVISION AND NOT AN ASCERTAINED LIABILITY, THE EXACT CRYSTALLIZATION THEREOF IS NOT ASCERTAINED AT THE TIME OF CLAIMING OF THE EXPENDITURE IN THE BOOSK OF ACCOUNTS BY THE ASSESSEE. MOREOVER, IT IS A SETTLED LAW THAT AN EXPENDITURE WHICH IS DEDUCTIBLE SHOULD BE R ELATABLE TOWARDS A LIABILITY EXISTING IN THE YEAR OF 3 ITA NO. 3170/MUM/2015 (A.Y. 2008 - 09) DBOI GLOBAL SERVICES PRIVATE LIMITED VS. PR. CIT ACCOUNTING OR A LIABILITY WHICH HAS ALREADY BE E N ASCERTAINED . THE EXPENDITURE RE LATABLE TO ISSUE O F EQUITY OPTIONS IN FUTURE TO THE EMPLOYEES CONSTITUTE A CONTINGENT LIABILITY WH ICH CANNOT BE ALLOWED AS A EXPENDITURE SINCE THE SAME IS RELATABLE TOWARDS FUTURE PENDING OBLIGATION NOT DETERMINABLE WITH REASONABLE CERT AINTY IN THE YEAR OF ACCOUNTING. THE ASSESSING OFFIC ER HAS MERELY ALLOWED THE SAID CL AIM OF THE ASSESSEE WITHOUT MAKING PROPER ENQUIRIES OR PROPER APPLICATION OF MIND. FURTHER, SUCH EXPENSES ARE NOT TO BE ALLOWED IN THE YEAR OF MAKING THE PROVISIONS AND TH E SAME IS UPHELD IN THE CASE OF VIP INDUSTRIES VS. D CI T, I TA N O .7242/MUM/2 008 AND SIMILARLY BY THE ITAT DELHI COURT IN THE CASE OF RANBAXY VS. ADDL. CIT 2009 124 J 771 ( DE L ) . 2. THEREFORE, IN VIE W OF THE ABOVE, IT IS EVIDENT THAT AN AMOUNT OF RS. 11,19,35 ,000/ - CLAIMED BY THE ASSESSEE ON THIS ACCOUNT IS ALLOWED BY THE ASSESSING OFFICER WITHOUT PROPER VERIFICATION AND WITH PROPER APPLICATION OF MIND NOT WITHSTANDING THE F AC T THA T AS PER THE PROVISIONS OF THE ACT THE EXPENDITURE CLAIMED WAS NOT ALLOWABLE. TH EREFORE, IN VIEW OF TH E ABOVE, THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER DATED 21.10.2012 U/S. 143(3) R.W.S. 144C(13)OF THE ACT IS FOUND TO BE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE WITHIN THE MEANING OF THE PROVISIONS OF SECTION 2 63 OF THE ACT. 4. THE ASSESSEES RESPONSE TO THE ABOVE NOTICE WAS NOTED BY THE LD. COMMISSIONER OF INCOME TAX AS UNDER: 2. IN RESPONSE TO THE SHOW CAUSE NOTICE ISSUED, THE A.R OF THE APPELLANT MS. BAHROZE KAMDIN, MRS. SMITA PARUIKAR AND MS. VIDHYA SHENOY , CAS ATTENDED THE PROCEEDINGS AND SUBMITTED THAT THE ESOP EXPENSE INCURRED BY THE ASSESSEE COMPANY IS INCLUDED UNDER THE HEAD 'EMPLOYEE COST' IN SCHEDULE (13) OF ITS P & L ACCOUNT FOR THE RELEVANT ASSESSMENT YEAR. IT WAS FURTHER SUBMITTED THAT IT IS AN AC TUAL EXPENDITURE INCURRED BY THE ASSESSEE COMPANY ON ACCOUNT OF CHARGE FOR GRANTING ESOPS TO ITS ELIGIBLE EMPLOYEES. THESE EXPENSE BEING IN THE NATURE OF SHARE BASED PAYMENTS ARE CHARGED TO ITS P & L ACCOUNT BY THE ASSESSEE COMPANY WHICH IS AN ASCERTAINED L I ABILITY, THEREFORE, NO DISALLOWANCE OUGHT TO BE MADE WITH REGARD TO THESE EXPENSES. IT WAS FURTHER SUBMITTED THAT THESE EXPENSE IS CLAIMED AS DEDUCTION IN THE YEAR OF VESTING OF SHARES AND NOT I N THE YEAR OF GRANT OF THE STOCK OPTIONS. THEREFORE, IT IS N OT A CONTINGENT LIABILITY OR UNASCERTAINED LIABILITY IN THE YEAR OF VESTING OF THE HSOPS. ELABORATING MORE FACTS WITH REGARD TO THE ISSUE OF ESOPS, THE AR HAS FURTHER SUBMITTED THAT IN THE YEAR UNDER CONSIDERATION, THE ELIGIBLE EMPLOYEES OF THE ASSESSEE CO MPANY HAVE BEEN GRANTED ESOPS OF DEUTSCHE BANK A.G., THE ULTIMATE HOLDING COMPANY OF THE ASSESSEE COMPANY, AS PER THE SCHEME, THE EQUITY SHARES VESTS IN A GRADED 4 ITA NO. 3170/MUM/2015 (A.Y. 2008 - 09) DBOI GLOBAL SERVICES PRIVATE LIMITED VS. PR. CIT MANNER OVER A PERIOD OF 4 TO 5 YEARS AS HAVE BEEN STATED IN NOTE NO, 15.18 OF THE NOTES TO ACC OUNTS FORMING PART OF THE ITS FINAL ACCOUNTS. THE SHARE BASED PAYMENTS OF RS. 11,19,35,000 / - ARE THE ESOP EXPENSES INCURRED BY THE ASSESSEE COMPANY FOR THE ACQUISITION OF SHARES OF ITS ULTIMATE HOLDING COMPANY WHICH AS PER THE SCHEME WAS ALLOTTED TO ITS EMP LOYEES IN THE RELEVANT ASSESSMENT YEAR BEING THE YEAR OF VESTING OF THESE ESOPS. THIS EXPENDITURE IS INCURRED BY THE ASSESSEE COMPANY TO RETAIN, MOTIVATE AND AWARD ITS EMPLOYEES FOR THEIR HARD WORK AND HENCE ARE AKIN TO SALARY COST OF THE ASSESSEE COMPANY OR IN OTHER WORDS IN THE NATURE OF EMPLOYEE COMPENSATION. THIS EXPENDITURE IS NOT NOTIONAL OR UNASCERTAINED LIABILITY OR A PROVISION BUT IS THE ASCERTAINED EXPENDITURE BASED ON THE EQUITY SHARES VESTED TO THE EMPLOYEES. IT WAS FURTHER SUBMITTED THAT ALTHOU GH THE NOMENCLATURE USED IN NOTE NO. 15.18 IS 'PROVISION FOR SHARE BASED PAYMENTS', IN FACT IT IS AN ACTUAL EXPENDITURE INCURRED BY THE COMPANY ON ACCOUNT OF CHARGE FOR GRANTING ESOPS TO ITS ELIGIBLE EMPLOYEES. THEREFORE, THE AFORESAID EXPENDITURE NOT BEIN G IN THE NATURE OF PROVISION BUT AN ASCERTAINED LIABILITY OR CRYSTALIZED EXPENDITURE IS ALLOWABLE REVENUE EXPENDITURE U/S. 37(1) OF THE ACT THE AR HAS FURTHER SUBMITTED THAT ESOP EXPENSES ARE CONSIDERED AS PERQUISITES IN THE HANDS OF THE ELIGIBLE EMPLOYEES AND ACCORDINGLY, TAX DUE THERE ON IS ALREADY DEDUCTED AS PER LAW IN THE YEAR OF VESTING OF SUCH SHARES I.E. THE YEAR UNDER CONSIDERATION IN RESPECT OF THE PAYMENTS MADE FOR THE YEAR UNDER CONSIDERATION ON THIS ACCOUNT . 3 . THE AR HAS ALSO SUBMITTED THAT T HE LIABILITY FOR ESOP IS AN ACCRUED LIABILITY AS THE SERV ICES HAVE BEEN RENDERED BY THE EMPLOYEES AND THEREFORE, THE SAME ARE ALLOWABLE EXPENSES U/S 37 OF THE ACT REGARDING THE CASE LAWS : CAUSE NOTICE THE AR HAS SUBMITT ED THAT THESE DECISIONS OF ITAT DE L HI A RE DISTINGUISHABLE ON THE FACTS OF THE ASSESSEE'S CASE, AS IN T HOSE CASES IT IS A QUESTION OF NOTIONAL DISCOUNT OF SHARE PREMIUM AS COMPARED TO AN ACT UAL LIABILITY/ OUTFLOW IN THE CASE OF THE ASSESSEE COMPANY. IN THIS REGARD, IT WAS SUBMITTED THAT IN T HE CASES OF RANBAXY & VIP, THE SHARES OF THOSE COMPANIES WERE TO BE ISSUED AND ONLY A NOTIONAL LOSS OF SHARE PREMIUM WHICH OTHERWISE WOULD HAVE BEEN RECEIVED IS CLAIMED AS DEDUCTION WHILE IN THE CASE OF THE ASSESSEE COMPANY, THE COMPANY IS NOT ISSUING ITS OWN SHARES BUT THE SHARES OF ITS PARENT COMPANY WILL BE ALLOTTED TO THE EMPLOYEES OF THE ASSESSEE COMPANY THE PAYMENT FOR WHICH I S MADE BY THE ASSESSEE COMPANY. THEREFORE, ON ACCOUNT OF THE ABOVE, IT WAS SUBMITTED THAT THE ESOP EXPENSES I.E. SHARE BASED PA YMENTS ARE IN THE NATURE OF CHARGE TO THE COMPANY AND ARE ASCERTAINED LIABILITY / EXPENDITURE AND HENCE NO DISALLOWANCE OUGHT TO BE MADE WITH RESPECT TO THESE EXPENSES. 4. IN ADDITION TO THE ABOVE, THE AR HAS FURTHER SUBMITTED THAT THE ASSESSMENT ORDER P ASSED BY THE AO IS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE 5 ITA NO. 3170/MUM/2015 (A.Y. 2008 - 09) DBOI GLOBAL SERVICES PRIVATE LIMITED VS. PR. CIT INTEREST OF REVENUE AS THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS HAS ALREADY RAISED A SPECIFIC QUERY ON THE ISSUE OF ALLOWANCE OF ESOP EXPENSES DURING THE SCRUTINY PROCEEDINGS AND HAS ALL OWED THE EXPENDITURE SO CLAIMED AFTER DUE APPLICATION OF MIND AND CONSIDERING TO THE SUBMISSION /EXPLANATION FURNISHED BY THE ASSESSEE. THEREFORE, IT WAS SUBMITTED THAT THE DEDUCTION SO ALLOWED BY THE AO AFTER DUE VERIFICATION, APPLICATION OF MIND AND GETT ING HIMSEIF FULLY SATISFIED, CANNOT BE SUBJECT MATTER OF REVISION U/S 263 OF THE ACT. IT WAS ARGUED ACCORDINGLY, THAT IT THEREFORE, MAKES THE ASSESSMENT ORDER NEITHER ERRONEOUS NOR PREJUDICI AL TO THE INTEREST OF REVENUE. 5. HOWEVER , THE LD. COMMISSIONER O F INCOME TAX WAS NOT CONVINCED. HE DISCUSSED VARIOUS ASPECTS AND I N PARAGRAPH 10 OF HIS ORDER OBSERVED AS UNDER: 10. THEREFORE, IT IS ESTABLISHED FROM THE ASSESSMENT RECORDS THAT COMPLETE DETAILS IN THIS REGARD WAS NOT FILED BY THE ASSESSEE NOR CALLE D FOR BY THE AO BEFORE ALLOWING SUCH DEDUCTION. SECONDLY, THE AO HAS ALTHOUGH ASKED THE ASSESSEE AS TO WHETHER THE EXPENDITURE CLAIMED ON THIS ACCOUNT IS IN THE NATURE OF CAPITAL OR REVENUE BUT NOT FROM THE POINT OF VIEW OF THE SAME TO BE CONSIDERED AS CON TINGENT EXPENDITURE, WAS NEVER ENQUIRED BY THE AO. IT THEREFORE, PROVES THAT LACK OF ENQUIRY COUPLED WITH NON - APPLICATION OF MIND ON THE PART OF THE AO, THE ORDER PASSED BY HIM AS REFERRED ABOVE, IS ERRONEOUS AS WELL AS PREJUDICIAL TO THE INTEREST OF REVEN UE. 6. THEREAFTER, THE LD. COMMISSIONER OF INCOME TAX REFERRED TO SOME TRIBUNALS DECISIONS AND DISTINGUISHED THE CASE LAWS RELIED UPON BY THE ASSESSEE AND FINALLY GAVE A FOLLOWING DIRECTION: 20. THEREFORE, ON ACCOUNT OF THE AFORESAID FACTS AND THE POSITI ON OF LAW, THE ASSESSMENT ORDER PASSED U/S. 143(3) R.W.S. 144C(13) OF THE ACT DATED 21.10.2012 IS FOUND TO BE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE AS PER THE PROVISIONS OF SECTION 263 OF THE ACT, SINCE, THE A.O. HAS MECHANICALLY ALLOWED ESO P EXPENDITURE CLAIMED BY THE ASSESSEE WITHOUT ESTABLISHING WHETHER THE SAME HAS ACTUALLY ACCRUED OR NOT WHICH HAS DIRECT IMPLICATION ON THE COMPUTATION OF TAXABLE INCOME OF THE ASSESSEE COMPANY FOR THE YEAR UNDER CONSIDERATION. THEREFORE, THE SAID ASSESSME NT ORDER IS SET ASIDE ON THIS ISSUE TO BE PASSED A FRESH AS PER LAW AND AFTER CONDUCTING NECESSARY ENQUIRIES AND INVESTIGATIONS AND AFTER GIVING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 6 ITA NO. 3170/MUM/2015 (A.Y. 2008 - 09) DBOI GLOBAL SERVICES PRIVATE LIMITED VS. PR. CIT 7. AGAINST THE ABOVE ORDER, THE ASSESSEE IS IN APPEAL BE FORE US. 8. WE HAVE HEARD BOTH THE CO UNSEL AND PERUSED THE RECORDS. FROM A N EXAMINATION OF THE NOTICE ISSUED U/S. 263 OF THE ACT, IT IS EVIDENT THAT IN THE SHOW CAUSE NOTICE, THE LD. COMMISSIONER OF INCOME TAX HAS EXPRESSED HIS OPINION THAT THE ASSESSEE S CLAIM OF EXPENDITURE TOWARDS EMPLOYEE COST ON ACCOUNT OF EQUITY STOCK OPTIONS , WAS PAYABLE IN FUTURE AND WAS AN UNASCERTAINED LIABILITY. THAT THE SAID EXPENDITURE RELATED TO ISSUE O F EQUITY OPTIONS IN FUTURE TO THE EMPLOYEES AND CONSTITUTE D A CONTINGENT LIABILITY WH ICH CANNOT BE ALLOWED AS A N EXPENDITURE SINCE THE SAME IS RELATABLE TOWARDS FUTURE PENDING OBLIGATION NOT DETERMINABLE WITH REASONABLE CERTAINTY IN THE YEAR OF ACCOUNTING . THE LD. COMMISSIONER OF INCOME TAX HAS REFERRED TO CERTAIN TRIBUNALS D ECISIONS IN SUPPORT OF THIS PROPOSITION. IT IS TRITE LAW THAT THE FINAL DIRECTIONS/ORDER U/S. 263 CANNOT BE WITH RESPECT TO ISSUES DIFFERENT FROM THAT MENTIONED IN THE SHOW CAUSE NOTICE. BEING AWARE OF THIS PROPOSITION OF LAW, THE LD. COMMISSIONER OF INCOM E TAX IN HIS CONCLUDING PARA 20 OF HIS ORDER HAS HELD THAT THE ASSESSING OFFICER HAS MECHANICALLY ALLOWED ESOP EXPENDITURE CLAIMED BY THE ASSESSEE WITHOUT ESTABLISHING WHETHER THE SAME HAS ACTUALLY ACCRUED OR NOT , WHICH HAS DIRECT IMPLICATION ON THE COMPUT ATION OF THE TAXABLE INCOME OF THE ASSESSEE COMPANY FOR THE YEAR UNDER CONSIDERATION. 9. I N THIS REGARD, WE NOTE THAT THE PROPOSITION THAT ESOP EXPENDITURE IS NOT CONTINGENT LIABILITY , HAS BEEN DULY UPHELD BY THE SPECIAL BENCH OF THE ITAT IN THE 7 ITA NO. 3170/MUM/2015 (A.Y. 2008 - 09) DBOI GLOBAL SERVICES PRIVATE LIMITED VS. PR. CIT CASE OF BICON LTD. VS. DCIT 35 TAXMANN.COM 355 (BANG)(SB). THE EXPOSITION IN THIS SPECIAL BENCH DECISION CAN BE GAINFULLY REFERRED TO AS IN A SUMMARIZED MANNER: WHETHER DISCOUNT UNDER ESOP IS A SHORT CAPITAL RECEIPT THERE IS NO DOUBT THAT THE AMOUNT OF SHARE PR EMIUM IS OTHERWISE A CAPITAL RECEIPT AND, HENCE, NOT CHARGEABLE TO TAX IN THE HANDS OF COMPANY. IF A COMPANY ISSUES SHARES TO THE PUBLIC OR THE EXISTING SHAREHOLDERS AT LESS THAN THE OTHERWISE PREVAILING PREMIUM DUE TO MARKET SENTIMENT OR OTHERWISE, SUCH S HORT RECEIPT OF PREMIUM WOULD BE A CASE OF A RECEIPT OF A LOWER AMOUNT ON CAPITAL ACCOUNT. IT 15 SO BECAUSE THE OBJECT OF ISSUING SUCH SHARES AT A LOWER PRICE IS NOWHERE DIRECTLY CONNECTED WITH THE EA RNING OF INCOME. IT IS IN SUCH LIKE SITUATION THAT THE C ONTENTION OF THE REVENUE WOULD PROPERLY FIT IN, THEREBY DEBARRING THE COMPANY FROM CLAIMING ANY DEDUCTION TOWARDS DISCOUNTED PREMIUM. [PARA 9.2.6] IT IS QUITE BASIC THAT THE OBJECT OF ISSUING SHARES CAN NEVER BE LOST SIGHT OF. HAVING SEEN THE RATIONAL E AND MODUS OPERANDI OF THE ESOP, IT BECOMES OUT - AND - OUT CLEAR THAT WHEN A COMPANY UNDERTAKES TO ISSUE SHARES TO ITS EMPLOYEES AT A DISCOUNTED PREMIUM ON A FUTURE DATE, THE PRIMARY OBJECT OF THIS EXERCISE IS NOT TO RAISE SHARE CAPITAL, BUT TO EARN PROFIT B Y SECURING THE CONSISTENT AND CONCENTRATED EFFORTS OF ITS DEDICATED EMPLOYEES DURING THE VESTING PERIOD. SUCH DISCOUNT IS CONSTRUED, BOTH BY THE EMPLOYEES AND COMPANY, AS NOTHING BUT A PART OF PACKAGE OF REMUNERATION. IN OTHER WORDS, SUCH DISCOUNTED PREMIU M ON SHARES IS A SUBSTITUTE TO GIVING DIRECT INCENTIVE IN CASH FOR AVAILING THE SERVICES OF THE EMPLOYEES. THERE IS NO DIFFERENCE IN TWO SITUATIONS VIZ., ONE, WHEN THE COMPANY ISSUES SHARES TO PUBLIC AT MARKET PRICE AND A PAN OF THE PREMIUM IS GIVEN TO THE EMPLOYEES IN LIEU OF THEIR SERVICES AND TWO, WHEN THE SHARES ARE DIRECTLY ISSUED TO EMPLOYEES AT A REDUCED RATE. IN BOTH THE SITUATIONS, THE EMPLOYEES STAND COMPENSATED FOR THEIR EFFORT. IT FOLLOWS THAT THE DISCOUNT ON PREMIUM UNDER ESOP IS SIMPLY ONE OF THE MODES OF COMPENSATING THE EMPLOYEES FOR THEIR SERVICES AND IS A PART OF THEIR REMUNERATION. THUS, THE CONTENTION OF THE REVENUE THAT BY ISSUING SHARES TO EMPLOYEES AT A DISCOUNTED PREMIUM, THE COMPANY GOT A LOWER CAPITAL RECEIPT, IS BEREFT OF ANY FORCE . BY NO STRETCH OF IMAGINATION, SUCH DISCOUNT CAN BE DESCRIBED AS EITHER A SHORT CAPITAL RECEIPT OR A CAPITAL EXPENDITURE. IT IS NOTHING BUT THE EMPLOYEES COST INCURRED BY THE COMPANY. [9.2.6] THE REVENUE ALSO CANVASSED A VIEW THAT AN EXPENDITURE DENO TES 'PAYING OUT OR AWAY' AND UNLESS THE MONEY GOES OUT FROM THE ASSESSEE, THERE CAN BE NO 8 ITA NO. 3170/MUM/2015 (A.Y. 2008 - 09) DBOI GLOBAL SERVICES PRIVATE LIMITED VS. PR. CIT EXPENDITURE SO AS TO QUALIFY FOR DEDUCTION UNDER SECTION 37. SECTION 37(1) PROVIDES THAT AN EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PU RPOSE OF BUSINESS SO AS TO BE ELIGIBLE FOR DEDUCTION. THERE IS ABSOLUTELY NO DOUBT THAT SECTION 37(1) TALKS OF GRANTING DEDUCTION FOR AN 'EXPENDITURE'. HOWEVER, IT IS PERTINENT TO NOTE THAT THIS SECTION DOES NOT RESTRICT PAYING OUT OF EXPENDITURE IN CASH A LONE. WHEN THE DEFINITION OF THE WORD 'PAID' UNDER SECTION 43(2) IS READ IN JUXTAPOSITION TO SECTION 37(1), THE POSITION WHICH EMERGES IS THAT IT IS NOT ONLY PAYING OF EXPENDITURE, BUT ALSO INCURRING OF THE EXPENDITURE WHICH ENTAILS DEDUCTION UNDER SECTION 37(1) SUBJECT TO THE FULFILMENT OF OTHER CONDITIONS. THEREFORE, BY UNDERTAKING TO ISSUE SHARES AT DISCOUNTED PREMIUM, THE COMPANY DOES NOT PAY ANYTHING TO ITS EMPLOYEES, BUT INCURS OBLIGATION OF ISSUING SHARES AT A DISCOUNTED PRICE ON A FUTURE DATE IN LIE U OF THEIR SERVICES, WHICH IS NOTHING BUT AN EXPENDITURE UNDER SECTION 37(1). [PARA 9.2.7] WHETHER DISCOUNT IS A CONTINGENT LIABILITY IT I S A TRITE LAW THAT DEDUCTION IS PERMISSIBLE IN RESPECT OF AN ASCERTAINED LIABILITY AND NOT A CONTINGENT ABILITY. FRO M THE STAND POINT OF THE COMPANY, THE OPTIONS UNDER ESOP VEST WITH THE EMPLOYEES AT THE RATE OF 25 PER CENT ONLY ON PUTTING IN SERVICE FOR ONE YEAR BY THE EMPLOYEES. UNLESS SUCH SERVICE IS RENDERED, THE EMPLOYEES DO NOT QUALIFY FOR SUCH OPTIONS. IN OTHER W ORDS, RENDERING OF SERVICE FOR ONE YEAR IS SINE QUA FOR BECOMING ELIGIBLE TO AVAIL THE BENEFIT UNDER THE SCHEME'. ONCE THE SERVICE IS RENDERED FOR ONE YEAR, IT BECOMES OBLIGATORY ON THE PART OF THE COMPANY TO HONOUR ITS COMMITMENT OF ALLOWING THE VESTING O F 25 PER CENT OF THE OPTION. IT IS AT THE END OF THE FIRST YEAR THAT THE COMPANY INCURS LIABILITY OF FULFILLING T ITS PROMISE OF ALLOWING PROPORTIONATE DISCOUNT, WHICH LIABILITY WOULD ACTUALLY BE DISCHARGED AT THE END OF THE FOURTH YEAR WHEN THE OPTIONS AR E EXERCISED BY THE EMPLOYEES. [PARA 9.3.2] THE PRINCIPLE LAID DOWN IN THE CASE OF BHARAT EARTH MOVERS V. CIT [2000] 245 ITR 428/112 TAXMAN 61 (SC) WAS THAT A LIABILITY DEFINITELY INCURRED BY AN ASSESSEE IS DEDUCTIBLE NOTWITHSTANDING THE FACT THAT ITS QUANTIFICATION MAY TAKE PLACE IN A LATER YEAR. THE MERE FACT THAT THE QUANTIFICATION IS NOT PRECISELY POSSIBLE AT THE TIME OF INCURRING THE LIABILITY WOULD NOT MAKE AN ASCERTAINED LIABILITY A CONTINGENT. ALMOST TO THE SIMILAR EFFECT IS THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA (P.) LTD. V. CIT [2009] 314 ITR 62/180 TAXMAN 422. [PARAS 9.3.3 AND 9.3.4] CONSIDERING THE FACTS OF THE PRESENT CASE IN THE BACKDROP OF THE RATIO LAID DOWN BY THE SUPREME COURT IN BHARAT EARTH MOVERS (SUPRA) AND ROTORK CONTROLS INDIA (P.) LTD. (SUPRA), IT BECOMES VIVID THAT THE MANDATE OF THESE 9 ITA NO. 3170/MUM/2015 (A.Y. 2008 - 09) DBOI GLOBAL SERVICES PRIVATE LIMITED VS. PR. CIT CASES IS APPLICABLE WITH FULL FORCE TO THE DEDUCIBILITY OF THE DISCOUNT ON INCURRING OF LIABILITY ON THE RENDITION OF SERVICE BY THE EMPLOYEES. THE FACTUM OF TH E EMPLOYEES BECOMING ENTITLED TO EXERCISE OPTIONS AT THE END OF THE VESTING PERIOD AND IT IS ONLY THEN THAT THE ACTUAL AMOUNT OF DISCOUNT WOULD BE DETERMINED, IS AKIN TO THE QUANTIFICATION OF THE PRECISE LIABILITY TAKING PLACE AT A FUTURE DATE, THEREBY NOT DISTURBING THE OTHERWISE LIABILITY WHICH STOOD INCURRED AT THE END OF EACH YEAR ON AVAILING THE SERVICES. IT IS, THEREFORE, HELD THAT THE DISCOUNT IN RELATION TO OPTIONS VESTING DURING THE YEAR CANNOT BE HELD AS A CONTINGENT LIABILITY. [PARAS 9.3.5 AND 9. 3.6] WHETHER DEDUCTION IS ALLOWABLE M ALSO, IT IS DISCERNIBLE FROM THE ABOVE PROVISIONS OF FRINGE BENEFIT TAX THAT THE LEGISLATURE ITSELF CONTEMPLATES THE DISCOUNT ON PREMIUM UNDER ESOP AS A BENEFIT PROVIDED BY THE EMPLOYER TO ITS EMPLOYEES DURING THE C OURSE OF SERVICE. IF THE LEGISLATURE CONSIDERS SUCH DISCOUNTED PREMIUM TO THE EMPLOYEES AS A FRINGE BENEFIT OR 'ANY CONSIDERATION FOR EMPLOYMENT', IT IS NOT OPEN TO ARGUE CONTRARY. ONCE IT IS HELD AS A CONSIDERATION FOR EMPLOYMENT, THE NATURAL COROLLARY WH ICH FOLLOWS IS THAT SUCH DISCOUNT I) IS AN EXPENDITURE; II) SUCH EXPENDITURE IS ON ACCOUNT OF AN ASCERTAINED (NOT CONTINGENT) LIABILITY ; AND III) IT CANNOT BE TREATED AS A SHORT CAPITAL RECEIPT. THEREFORE, DISCOUNT ON SHARES UNDER THE ESOP IS AN ALLOWABLE DEDUCTION. [PARA 9.4.1] QUANTUM OF DEDUCTION AN EMPLOYEE BECOMES ENTITLED TO THE SHARES AT A DISCOUNTED PREMIUM OVER THE VESTING PERIOD DEPENDING UPON THE LENGTH OF SERVICE PROVIDED BY HIM TO THE COMPANY. IN ALL SUCH SCHEMES, IT IS AT THE END OF THE V ESTING PERIOD THAT OPTION IS EXERCISABLE ALBEIT THE PROPORTIONATE RIGHT TO OPTION IS ACQUIRED BY RENDERING SERVICE AT THE END OF EACH YEAR. [PARA 10.3] SIMILAR IS THE POSITION FROM THE STAND POINT OF THE COMPANY. AN OBLIGATION FALLS UPON THE COMPANY T O ALLOT SHARES AT THE TIME OF EXERCISE OF OPTION DEPENDING UPON THE LENGTH OF SERVICE RENDERED BY THE EMPLOYEE DURING THE VESTING PERIOD. THE INCURRING OF LIABILITY TOWARDS THE DISCOUNTED PREMIUM, BEING COMPENSATION TO EMPLOYEE, IS DIRECTLY LINKED WITH THE SPAN OF SERVICE PUT IN BY THE EMPLOYEE. IT, THEREFORE, TRANSPIRES THAT A COMPANY, UNDER THE MERCANTILE SYSTEM CAN LAWFULLY CLAIM DEDUCTION FOR TOTAL DISCOUNTED PREMIUM REPRESENTING THE EMPLOYEES COST OVER THE VESTING PERIOD AT THE RATE AT WHICH THERE IS V ESTING OF OPTIONS IN THE EMPLOYEES. [PARA 10.4] THEREFORE, IT IS APPARENT THAT THE COMPANY INCURS LIABILITY TO ISSUE SHARES AT THE DISCOUNTED PREMIUM ONLY DURING THE VESTING PERIOD. THE LIABILITY IS NEITHER 10 ITA NO. 3170/MUM/2015 (A.Y. 2008 - 09) DBOI GLOBAL SERVICES PRIVATE LIMITED VS. PR. CIT INCURRED AT THE STAGE OF THE GRANT OF OPTION S NOR WHEN SUCH OPTIONS ARE EXERCISED. [PARA 10.5] CONSIDERING THE QUESTIONS OF 'WHEN' AND 'HOW MUCH 1 OF DEDUCTION FOR DISCOUNT ON OPTIONS IS TO BE GRANTED, IT IS HELD THAT THE LIABILITY TO PAY THE DISCOUNTED PREMIUM IS INCURRED DURING THE VESTING PE RIO D AND THE AMOUNT OF SUCH DEDUCTION IS TO BE FOUND OUT AS PER THE TERMS OF THE ESOP SCHEME BY CONSIDER ING THE P ERIOD AND PERCENTAGE OF VESTING DURING SUCH PERIOD. THEREFORE, DEDUCTION OF THE DISCOUNTED PRE MIUM IS TO BE ALLOWED DURING THE YEARS OF VESTING ON A STRAIGHT LINE BASIS. [PARA 10.8] SUBSEQUENT ADJUSTMENT TO DISCOUNT REGARDING THE ADJUSTMENT OF DISCOUNT WHEN THE OPTIONS REMAIN UNVESTED OR LAPSE AT THE END OF THE EXERCI SE PERIOD, IT IS BUT NATURAL THAT THERE IS NO EMPLOYEE COST TO THAT EXTENT AND, HENCE, THERE CAN BE NO DEDUCTION OF DISCOUNT QUA SUCH PART OF UNVESTED OR LAPSING OPTIONS. BUT, AS THE AMOUNT WAS CLAIMED AS DEDUCTION BY THE COMPANY DURING THE PERIOD STARTING WITH THE DATE OF GRANT TILL THE HAPPENING OF THIS EVENT, SUCH DISCOUNT NEE DS TO BE REVERSED AND TAKEN AS INCOME. IT IS SO BECAUSE LOGICALLY WHEN THE OPTIONS HAVE NOT EVENTUALLY VESTED IN THE EMPLOYEES, TO THAT EXTENT, THE COMPANY HAS INCURRED NO EMPLOYEE COST. AND IF THERE IS NO COST TO THE COMPANY, THE TENTATIVE AMOUNT OF DEDUC TION EARLIER CLAIMED ON THE BASIS OF THE MARKET PRICE AT THE TIME OF GRANT OF OPTION CEASES TO BE ADMISSIBLE AND, HENCE, NEEDS TO BE REVERSED. [PARA 11.1.3] THE SECOND SITUATION IS WHEN THE OPTIONS ARE EXERCISED BY THE EMPLOYEES AFTER PUTTING IN SERVI CE DURING THE VESTING PERIOD. IN SUCH A SCENARIO, THE ACTUAL AMOUNT OF REMUNERATION TO THE EMPLOYEES WOULD BE ONLY THE AMOUNT OF ACTUAL DISCOUNTED PREMIUM AT THE TIME OF EXERCISE OF OPTION. THE SUPREME COURT IN THE CASE OF LD. COMMISSIONER OF INCOME TAX V . INFOSYS TECHNOLOGIES LTD. [2008] 297 ITR 167/116 TAXMAN 204 HELD THAT THE ALLOTMENT OF SHARES TO EMPLOYEES UNDER ESOP, SUBJECT TO A LOCK IN PERIOD OF FIVE YEARS AND OTHER CONDITIONS COULD NOT BE TREATED AS A PERQUISITE AS THERE WAS NO BENEFIT AND THE VAL UE OF BENEFIT, IF ANY, WAS UNASCERTAINABLE AT THE TIME WHEN OPTIONS WERE EXERCISED. [PARA 11.1.4] FROM THE PROVISIONS OF SECTION 17(2), TWO THINGS SURFACE. FIRST, THAT THE PERQUISITE ARISES ON THE 'ALLOTMENT 1 OF SHARES AND SECOND, THE VALUE OF SUCH PER QUISITE IS TO BE COMPUTED BY CONSIDERING THE FAIR MARKET VALUE OF THE SHARES ON 'THE DATE ON WHICH THE OPTION IS EXERCISED' BY THE ASSESSEE AS REDUCED BY THE AMOUNT ACTUALLY PAID. THE POSITION THAT SUCH AMOUNT WAS OR WAS NOT TAXABLE DURING SOME OF THE YEAR S IN THE HANDS OF THE EMPLOYEES IS NOT RELEVANT IN 11 ITA NO. 3170/MUM/2015 (A.Y. 2008 - 09) DBOI GLOBAL SERVICES PRIVATE LIMITED VS. PR. CIT CONSIDERING THE OCCASION AND THE AMOUNT OF BENEFIT ACCRUING TO THE EMPLOYEE UNDER ESOP. ANY EXEMPTION OR THE DEDUCIBILITY OF AN ALLOWANCE OR BENEFIT TO EMPLOYEE FROM TAXATION DOES NOT OBLITERATE THE BENEFI T ITSELF. IT SIMPLY MEANS THAT THE BENEFIT ACCRUED TO THE ASSESSEE BUT THE SAME DID NOT ATTRACT TAX. THE POSITION HAS NOW BEEN CLARIFIED BEYOND DOUBT BY THE LEGISLATURE THAT THE ESOP DISCOUNT, WHICH IS NOTHING BUT THE REWARD FOR SERVICES, IS A TAXABLE PERQ UISITE TO THE EMPLOYEE AT THE TIME OF EXERCISE OF OPTION, AND ITS VALUATION IS TO BE DONE BY CONSIDERING THE FAIR MARKET VALUE OF THE SHARES ON THE DATE ON WHICH THE OPTION IS EXERCISED. [PARA 11.1.4] IT IS PALPABLE THAT SINCE THE REMUNERATION TO THE E MPLOYEES UNDER THE ESOP IS THE AMOUNT OF DISCOUNT WITH RESPECT TO THE MARKET PRICE OF SHARES AT THE TIME OF EXERCISE OF OPTION, THE EMPLOYEE COST IN THE HANDS OF THE COMPANY SHOULD ALSO BE WITH RESPECT TO THE SAME BASE. [PARA 11.1.5] THE AMOUNT OF DIS COUNT AT THE STAGE OF GRANTING OF OPTIONS WITH RESPECT TO THE MARKET PRICE OF SHARES AT THE TIME OF GRANT OF OPTIONS IS ALWAYS A TENTATIVE EMPLOYEE COST BECAUSE OF THE IMPOSSIBILITY IN CORRECTLY VISUALIZING THE LIKELY MARKET PRICE OF SHARES AT THE TIME OF EXERCISE OF OPTION BY THE EMPLOYEES, WHICH, IN TURN, WOULD REFLECT THE CORRECT EMPLOYEES COST. SINCE THE DEFINITE LIABILITY IS INCURRED DURING THE VESTING PERIOD, IT HAS TO BE QUANTIFIED ON SOME LOGICAL BASIS. IT IS THIS MARKET PRICE AT THE TIME OF THE GRA NT OF OPTIONS WHICH IS CONSIDERED FOR WORKING OUT THE AMOUNT OF DISCOUNT DURING THE VESTING PERIOD. BUT, SINCE ACTUAL AMOUNT OF EMPLOYEE COST CAN BE PRECISELY DETERMINED ONLY AT THE TIME OF THE EXERCISE OF OPTION BY THE EMPLOYEES, THE PROVISIONAL AMOUNT OF DISCOUNT AVAILED AS DEDUCTION DURING THE VESTING PERIOD NEEDS TO BE ADJUSTED IN THE LIGHT OF THE ACTUAL DISCOUNT ON THE BASIS OF THE MARKET PRICE OF THE SHARES AT THE TIME OF EXERCISE OF OPTIONS, [PARA 11.1.6] TAXATION VIS - A - VIS ACCOUNTING PRINCIPLES THE SUBMISSIONS PUT FORTH BY THE ASSESSEE THAT, IN THE ABSENCE OF ANY SPECIFIC PROVISION IN THE ACT, THE ACCOUNTING PRINCIPLES SHOULD BE FOLLOWED FOR DETERMINING THE TOTAL INCOME OF THE ASSESSEE ARE NOT ACCEPTABLE. WHAT IS TRUE FOR ACCOUNTING PURPOSE NEED NOT NECESSARILY BE TRUE FOR TAXATION. TAXATION PRINCIPLES ARE ENSHRINED IN THE LEGISLATURE. POWER TO LEGISLATE LIES WITH THE PARLIAMENT. ACCOUNTING STANDARDS OR GUIDANCE NOTE OR GUIDELINES ETC., ISSUED BY ANY AUTONOMOUS OR EVEN STATUTORY BODIES INCLUDING T HE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, OR THE SEBI ARE MEANT ONLY TO PRESCRIBE THE WAY THE TRANSACTIONS SHOULD BE RECORDED IN BOOKS OR REFLECTED IN THE ANNUAL ACCOUNTS. THESE GUIDE LINES DO NOT HAVE THE FORCE OF AN ACT OF PARLIAMENT. SINCE THE SUB JECT MATTER OF TAX ON INCOME FALLS IN THE U NION LIST AS PER PART XI OF THE 12 ITA NO. 3170/MUM/2015 (A.Y. 2008 - 09) DBOI GLOBAL SERVICES PRIVATE LIMITED VS. PR. CIT INDIAN CONSTITUTION, IT IS ONLY THE PARLIAMENT WHICH CAN LEGISLATE ON ITS PS. [PARA 11.2.3] CONCLUSION IN THE PRESENT CASE, THE ASSESSEE - COMPANY WAS A CLOSELY HELD COMPANY IN THE P REVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2003 - 04 AND AS SUCH THERE WAS NO QUESTION OF LISTING OF ITS SHARES AND HAVING SOME MARKET PRICE AT THE TIME OF GRANT OF OPTIONS. ORDINARILY, THE AMOUNT OF DISCOUNT ON PREMIUM WHICH IS WRITTEN OFF OVER THE VESTIN G PERIOD REPRESENTS THE MARKET PRICE OF THE SHARES LISTED ON THE STOCK EXCHANGE ON THE DATE OF GRANT OF OPTION AS REDUCED BY THE PRICE AT WHICH OPTION IS GIVEN TO THE EMPLOYEES. HOWEVER, SINCE THERE WAS NO AVAILABILITY OF ANY MARKET PRICE OF SUCH SHARES ON THE DATE OF GRANT OF OPTION AS THE COMPANY CAME TO BE LISTED ON A STOCK EXCHANGE IN A SUBSEQUENT YEAR, THE ASSESSEE - COMPANY TOOK THE MARKET PRICE OF THE SHARE ON THE DATE OF GRANT OF OPTION AT RS.919. NO MATERIAL WORTH THE NAME WAS PLACED ON RECORD TO IND ICATE AS TO HOW A SHARE WITH FACE VALUE OF RS.10 HAD BEEN VALUED AT RS.919 FOR CLAIMING DEDUCTION TOWARDS DISCOUNT AT RS.909 PER SHARE. THIS ASPECT OF VALUATION OF SHARES AT RS. 919 PER SHARE NEEDS TO BE EXAMINED BY THE ASSESSING OFFICER. [PARA 12.2] 10. FROM THE ABOVE, IT IS EVIDENT THAT THE SPECIAL BENCH HAS HELD THAT THE ESOP EXPENDITURE IS NOT A CONTINGENT LIABILITY AND , THAT IT IS AN EXPENDITURE , THAT SUCH EXPENDITURE IS ON ACCOUNT OF ASCERTAINED (NOT CONTINGENT LIABILITY) AND THAT IT CANNOT BE TREATE D AS A SHORT CAPITAL RECEIPT. THEREFORE, DIS COUNT ON SHARES IN T H E ESOP IS AN ALLOWABLE DEDUCTION. 11. FROM THE ABOVE, IT IS EVIDENT THAT THE PREMISE ADOPTED BY THE LD. COMMISSIONER OF INCOME TAX IN THE SHOW CAUSE NOTICE U/S. 263 THAT THE ESOP EXPENDITUR E WERE NOT ALLOWABLE, AS THEY WERE CONTINGENT LIABILITY AND HAS RELIANCE UPON THE TRIBUNALS DECISION IN THIS REGARD, STAND OVERRULED BY THE SPECIAL BENCH OF THE ITAT. HENCE, THE FINAL DIRECTION OF THE LD. COMMISSIONER OF INCOME TAX THAT THE ASSESSING OFF ICER SHOULD EXAMINE THE ISSUE AFRESH AFTER CONDUCTING NECESSARY ENQUIRY AND INVESTIGATION 13 ITA NO. 3170/MUM/2015 (A.Y. 2008 - 09) DBOI GLOBAL SERVICES PRIVATE LIMITED VS. PR. CIT A S THE SAME HAD NOT ACTUALLY ACCRUED , IS NOT AT ALL SUSTAINABLE. IT IS NOT THE CASE THAT THERE IS ANY HONBLE HIGH COURT DECISION ON THE ISSUE WHICH THE LD. COMMISSIO NER OF INCOME TAX HAS FOLLOWED, WHICH OVERRULED THE SPECIAL BENCH DECISION AS ABOVE. 12. IN BETWEEN, HIS ORDER U/S. 263 OF THE ACT BY THE LD. COMMISSIONER OF INCOME TAX HAS ALSO OBSERVED THAT THE ASSESSING OFFICER HAS NOT OBTAINED COMPLETE DETAILS IN THIS REGARD. WE FIND THAT AS ALREADY MENTIONED EARLIER, THIS ASPECT THAT THE ASSESSING OFFICER HAS NOT OBTAINED COMPLETE DETAILS WAS NOT MENTIONED IN THE SHOW CAUSE NOTICE , ISSUED UNDER SECTION 263, NOR IN THE FINAL AND CONCLUDING DIRECTION GIVEN BY THE LD. CO MMISSIONER OF INCOME TAX. HENCE, IN OUR CONSIDERED OPINION, THIS OBSERVATION OF THE LD. COMMISSIONER OF INCOME TAX HAS NO IMPACT IN THE FINAL 263 ORDER. BE THAT AS IT MAY, THE LD. DEPARTMENTAL REPRESENTATIVE HAS STATED THAT THIS OBSERVATION OF THE LD. COMM ISSIONER OF INCOME TAX IS IN ACCORDANCE WITH THE EXPLANATION 2 INSERTED IN SECTION 263(1) W.E.F. 01.06.2015 AS UNDER: EXPLANATION 2. - FOR THE PURPOSES OF THIS SECTION, IT IS HEREBY DECLARED THAT AN ORDER PASSED BY THE AO SHALL BE DEEMED TO BE ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTERESTS OF THE REVENUE, IF, IN THE OPINION OF THE PRINCIPAL COMMISSIONER OR COMMISSIONER, - (A) THE ORDER IS PASSED WITHOUT MAKING INQUIRIES OR VERIFICATION WHICH SHOULD HAVE BEEN MADE; (B) THE ORDER IS PASSED ALLOWING A NY RELIEF WITHOUT INQUIRING INTO THE CLAIM; (C) THE ORDER HAS NOT BEEN MADE IN ACCORDANCE WITH ANY ORDER, DIRECTION OR INSTRUCTION ISSUED BY THE BOARD UNDER SECTION 119; OR (D) THE ORDER HAS NOT BEEN PASSED IN ACCORDANCE WITH ANY DECISION WHICH IS PREJUDIC IAL TO THE ASSESSEE, RENDERED BY THE JURISDICTIONAL HIGH COURT OR SUPREME COURT IN THE CASE OF THE ASSESSEE OR ANY OTHER PERSON. 14 ITA NO. 3170/MUM/2015 (A.Y. 2008 - 09) DBOI GLOBAL SERVICES PRIVATE LIMITED VS. PR. CIT 13. THE LD. DEPARTMENTAL REPRESENTATIVE PLEADED THAT THIS EXPLANATION SHOULD BE READ RETROSPECTIVE LY AND I S APPLICABLE HERE. 14. WE FIND THAT AS ALREADY MENTIONED BY US, THIS OBSERVATION OF THE LD. COMMISSIONER OF INCOME TAX IS NOT IN ACCORDANCE WITH THE SHOW CAUSE NOTICE ISSUED , NOR IT IS CONTAINED IN THE FINAL DIRECTION OF THE LD. COMMISSIONER OF INCOME TAX. BE THAT AT IT MA Y, UPON AN EXAMINATION OF THE AFORESAID EXPLANATION, WE FIND THAT NONE OF THE CLAUSES MENTIONED ABOVE SUPPORT THE CASE OF THE REVENUE . THE LD. DEPARTMENTAL REPRESENTATIVE HAS REFERRED TO CLAUSE (A) WHICH MENTIONS THAT IF THE ORDER IS PASSED WITHOUT MAKING ANY ENQUIRIES OR VERIFICATION WHICH SHOULD HAVE BEEN MADE, THE ORDER MAY BE CONSIDERED FALLING IN THE AMBIT OF SECTION 263. WE FIND THAT THE LD. COMMISSIONER OF INCOME TAXS OBSERVATION DOES NOT FALL IN THIS CATEGORY. WHAT ENQUIRY OR VERIFICATION WHICH WAS NECESSARY AND WHICH HAS NOT BEEN DONE BY THE ASSESSING OFFICER HAS NOT BEEN SPELT OUT BY THE LD. COMMISSIONER OF INCOME TAX. THE LD. COMMISSIONER OF INCOME TAX HAS BL AN DLY MENTIONED THAT IT IS ESTABLISHED FROM THE ASSESSMENT RECORDS THAT COMPLETE DETAILS IN THIS REGARD WAS NOT FILED BY THE ASSESSEE AND NOR CALLED OUT BY THE ASSESSING OFFICER. THERE IS NO MENTION IN THIS REGARD AS TO WHAT WAS LA C KING IN THIS REGARD WHICH COULD HAVE PROVEN THAT THE EXPENDITURE WAS CONTINGENT IN NATURE. ACCORDINGLY, IN THE BA CKGROUND OF THE AFORE - SAID DISCUSSION AND PRECEDENT, WE DO NOT FIND THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX PASSED U/S. 263 HOLDING THE ESOP EXPENDITURE TO BE CONTINGENT AND DIRECTING FURTHER EXAMINATION 15 ITA NO. 3170/MUM/2015 (A.Y. 2008 - 09) DBOI GLOBAL SERVICES PRIVATE LIMITED VS. PR. CIT BY THE ASSESSING OFFICER SUSTAINABLE. ACCORD INGLY, WE SET ASIDE THE ORDER PASSED BY THE LD. COMMISSIONER OF INCOME TAX U/S. 263 AND DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. 15. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE STANDS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 11.12.2017 SD/ - SD/ - ( PAWAN SINGH ) (S HAMIM YAHYA ) / J UDICIAL MEMBER / A CCOUNTANT MEMBER MUMBAI ; DATED : 11.12.2017 . . ./ ROSHANI , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPON DENT 3. ( ) / THE CIT(A) 4. / CIT - CONCERNED 5. , , / DR, ITAT, MUMBAI 6. / GUARD F ILE / BY ORDER , / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI